Maharashtra experimented first with the idea of a franchise. But as one of the most industrialised states, will it be equally open to open access? VP Raja, Chairman, Maharashtra Electricity Regulatory Commission (MERC), tells Shashidhar Nanjundaiah why the imperatives are in favour of a successful implementation, provided competition can be introduced in power distribution.
What do you foresee as the implications of the deemed Open Access (OA) for the big users?
The power market is not developing because there is no purchasing power with the distribution company. The reasons are to do with the fact that electricity is a concurrent subject. Almost 98 per cent of the power in our country is sold through the state distribution companies—while the centre participated in generation and transmission by establishing companies like NTPC and Power Grid, distribution was left totally to the states.
Historically, electricity continues to be a commodity of political economy rather than a commodity in an economic sense, so its pricing has always been a political issue, and continues to be so. Regulators were brought in to depoliticise this exercise, but what can a regulator do if the state discom does not even file its tariff petitions? Tamil Nadu and Rajasthan did not file tariff petition for years together because state government did not permit them to. So even after unbundling, discoms cannot file a petition unless state permits them to. In states like Maharashtra, things are not that bad as the discom has been filing petitions and we have been granting tariff increases after due diligence—often, not to the degree that is requested.
How do you actually determine the tariff increase?
We adopt a two-stage process. We first determine what the annual revenue requirement is. Eighty per cent of the discom’s cost is towards power purchase, and we know the cost of power. The biggest cost of a generating station is the cost of the primary fuel, which is about 80 per cent. Which means your ultimate tariff (two-thirds of tariff) is nothing but the cost of primary fuel. So we determine the annual revenue requirement that is a sum of power purchase and the capital works which they take up through audited statements.
So we first do it by estimate, then we true it up after the accounts get audited. Our determination commences when the audit stops. To give you an example, you can lay a 1 km line by using copper, aluminium or gold wire. The auditor will approve all three, only making sure the wire is purchased at the best prices. We ask why do you need gold when you could have used aluminium wires. For all the items of expenditure we do this prudence check. The items of expenditure will be power purchase, capex, employee costs, repairs and maintenance.
Typically, will a regulator grant the minimum possible hike?
Yes, the regulator’s job is to protect the interest of the community and the ultimate consumer. This means the inefficiency of the utility should not be passed on to the consumer. One should be able to cut the fat without cutting its muscle. Therein lies the real trouble.
Do you also recommend ways in which the SEB can cut its inefficiencies?
We do. But there is a difference between the private and public utilities. The private makes an attempt becÂause there is no one to bail out. If I disallow a huge expense, the public utility uses its proverbial umbilical cord with the government. The government, willy nilly, is forced to bail it out.
Is it that while you would recommend X hike in tariff based on Y—which is cutting the inefficiency, the cutting in inefficiency does not happen but the hike does leading to more inefficiencies?
Yes, and it leads to the kind of a vicious circle.
Is that changing?
Yes and no. It is not changing as much as we would like it to. That has to do with state ownership itself. It can happen if the state is tough. But the state finds it difficult to be tough because they have political constiÂtuencies to protect. Suppose you are doing a business, a small business of selling vegetables. Let me ask you a question: Would you sell vegetables without weighing them? But the distribution companies sell a lot of elecÂtricity without metering it. A huge amount of agricultural supply is unmetered throughout India in all the states.
OA’s success is linked to another big issue—the progressive reduction of cross subsidy. In Maharashtra, the average cost of power is about Rs 4.6. But the hoardings and advertisings are charged about Rs 12. Commercial organisations are charged Rs 7-8. Industry is charged Rs 6. So they are charged much more than the average cost. On the other hand, residential consumers pay Rs 2.50, and agricultural users 30 p. Now the law says that the difference between the extremes—Rs 12 and 30 p—should be progressively brought down to 20 per cent plus minus of the average cost of supply.
What percentage of distributed power is unmetered?
In Maharashtra, for example, out of the total consuÂmption of electricity about 25 per cent goes to agriculture and 50 per cent of that amount is unmetered.
And that is recordable…
The purchase is recorded, so we can estimate the unmetered distribution. This gives a scope for maniÂpulation: A utility can show losses as free electricity given to agriculture. Second, there can be unholy alliÂance between an industrialist and an officer, so he helps the industrialist by providing a faulty meter and shows the difference as power to agriculture. It provides a milieu where the scope for corruption for unholy deeds all that increases. Everybody may not be doing it but some may be. Unmetered supply is a major unfortunate thing. One of the conditions I would strongly recomÂmend banks should place is not to lend money unless discoms lay a roadmap for 100 per cent metering.
Is there an attempt being made in any of the states?
Attempt is being made but that is turning out to be extremely difficult. In states like Maharashtra agricultural consumption is increasing, when it increases you proÂvide power but you cannot recover money so the indÂustrial tariffs are going up.
Which are some of the better performing states?
Gujarat is performing well, partly because the state has been thinking big, so a lot of new generation has come up, and along with it, new industries. Industries are opting for OA. In terms of generation capacities, Chhattisgarh, Madhya Pradesh and Gujarat have perÂformed well. There is plenty of OA in Punjab and Tamil Nadu—not because of the states’ commitment to OA but because of the perceived need. Punjab has shortage of power, so the state discom concentrates on agriculture while the industry uses power through OA.
How do you think states would react to the conÂditionalities you mentioned for the package? Do you think things will turn around?
The success will depend on the seriousness of the political leadership. The vote bank are the consumers because that is a very large number. In economics only holders of capital have a vote and it basically creates a conflict. In the Centre—as far as the electricity sector is concerned—economics is triumphing, while in the states it is politics.
I am of the view that the Centre will have to bring in some kind of a package but put strict conditionalities in the package in a carrot-and-stick way.
Should it be time-bound?
Yes. Time bound divided into milestones—quarterly or half yearly. And if the milestone is not achieved the next instalment should be stopped. It has to be monitored rather strictly using flow of money as the factor because the state will not listen to any kind of advice from the Centre.
Is that a good opportunity for the government to shoot off the banks’ shoulder?
The banks and the Centre are working in unison. So what you see happening is well orchestrated.
Do you believe that PPAs should be allowed to be broken midway because of certain inefficiencies or other environmental factors beyond the generator’s control?
Absolutely not. It is true that we have gone through a learning curve on this. But PPA is a contract and there has to be sanctity of contracts. After all, whether it is business or any transaction, no transaction can work if you allow that a contract can be broken. A contract can be broken only if the consequences follow if it is a breach of a contract. What is required is rework the PPA conÂtracts on mutually acceptable enabling clauses.
There may be a little flexibility or new room for manÂoeuvre but it has to be seen contract-wise and cannot be generalised. Most contracts allow changes if the law of the land is changed: increase in customs or excise duty, green tax on coal are examples. Now the question that has arose is what happens when there is a change of law in a foreign country like Indonesia, which raised import duty on coal. Perhaps there is no clause dealing with it in the contract that involves Indonesian coal.
Then at that point the regulator does not have a role to play.
Yes. If it is a standard contract, bad luck. Some contracts would have provided for it.
What is your analysis of the Shunglu Committee recommendation for franchise in power distribution?
The franchise method is a method to reduce disÂtribution losses. It reduces distribution loss again by cutting the nexus or link between the politician and the officer in charge. A private franchisee will not let go of revenue, so to that extent is able to resist any political overture, and manage it; that is not so with an officer of the discom, who can be harassed.
The first franchise experience was in Bhiwandi, Maharashtra, and met with broad success.
But how did they bring down the losses? The question is can the method be standardised since it is not necessarily systematic? Strong-arm tactics are probably necessary in many parts of India especially in tricky locations.
That well could be. Some intellectuals say that in a franchise, the licensee should be responsible. The consumer can approach the licensor, the [State Regulatory] Commission, who will only question the licensee [the state discom] and not the franchisee [the contractor], who is only the licensee’s agent. So the licensee is answerable to the Commission. The franchise is in turn answerable to the licensee.
But I will encourage the franchise system in urban areas for another reason as well. Franchise is an inteÂrmediary model for much needed competition: A fraÂnchisee gets acquainted with the business through the franchise and in due course bid for a distribution licence. Nine years after the EA, there is cause for worry: The market has not been developing. We have multiple sellers but still largely a single buyer—the state discom. So how do we create multiple buyers? The new interpretation of the Open Access tries to create a market mechanism.
Does it create competition among states also?
It can create competition among generators. For example, Jindal has already advertised that they can provide electricity from their Chhattisgarh plant for users needing more than 5 MW. This is a step in the right direction.
But states do have to compete if they need to buy…
It will put some fear in state discoms, which is good. When the cash cows—the larger consumers—leave him, he loses money so his financial position gets constraint. In the process of reengineering itself, a discom reiterates to the energy minister and the chief minister that they cannot survive this way.
So when Jindal advertised, did many of you heave a sigh of you that somebody had taken an initiative, because it all depended on an initiative, didn’t it?
Yes. There was a completely different initiative taken where the Rajasthan distribution companies felt it is to their advantage. So they issued a circular and some of the bigger consumers have gone to the regulator. So some action is going on in Rajasthan.
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